Ukraine – Then and Now

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In May, 2008, a German grain analyst cornered me at a cocktail party in Kiev and demanded to know when the Board of Trade was going to force convergence of soft red wheat futures with cash market prices. I replied, “Prices will converge when someone wants to buy lots of it” and headed for the appetizers. Hundreds of Europeans had arrived at the UkrAgroConsult conference with loan commitments from their bankers, hoping to participate in a land rush to buy cheap, productive Ukrainian farm land. Sergey Feofiov, head of UkrAgro, had hoped to be able to tell them when the crush would begin. But Ukraine’s parliament said “Nyet” and they all went home disappointed.

A few days earlier in Warsaw, a Polish meat company executive had told me and my travel companion, Lance Mistlebacher of Maple Leaf Foods, “You have to remember three things about Ukraine. One, Russia has bankrupted Ukraine twice in the past twenty years – once in 1989/90 when the USSR crumbled and again in 1998 when the Ruble collapsed. Two, Russia effectively enslaved Ukrainians in the late 1920s by collectivizing farmland. Stalin sold every ounce of Ukraine’s crops, forced former owners to become serfs, and destroyed all land ownership records. Few remember how to own land. Three, Russia bequeathed graft as a way of life to its Soviet citizens. We Poles avoided collectivization until the 1960s and kept our land records. When Russia left, we dusted off the records and divvied up the land.”

Russia invaded Georgia three months later, sank its navy, and humiliated its small army. By January, 2009, world financial markets were melting. Banks that had hoped to finance land in Ukraine suddenly did not know if they would survive. Crude oil fell from $140 to $35. Russian rubles fell 35% in five months, dragging Ukraine’s hryvnia down.

In the next four years, I returned to Ukraine twice. On the 2010 trip, inflation had Ukraine in its grip with working capital loans costing 20+%. Europeans stayed home and most conference attendees came from Russia, Bulgaria, and Turkey. Natalie Jaresko, head of Ukraine’s Horizon Capital investment firm in Kiev, warned me that “corruption in government and business is our biggest problem. None of the presidential candidates will do anything to change that.” In 2012, Anne Frick spoke at the UkrAgro conference. We also met two well-known Ukrainian entrepreneurs in their offices. Andriy Vadatursky, son of NIBULON’s founder, showed us their modern Nikolaev export elevator on the Black Sea (photo) and told us, “Grain exports will continue to grow at double-digits.” Yuriy Kosiuk, founder and chairman of MHP, Ukraine’s largest poultry producer and exporter to Europe said, “We don’t hedge our corn needs in futures because MHP owns large land parcels and we contract for the balance of what we don’t produce. But I would like to understand better how put options work.” After much analysis, MHP decided options were not for them.

Today, Russia controls Crimea and two other oblasts that account for about 7% of Ukraine’s land mass. Fighting in those areas has cost the lives of 8,000 Ukrainians and wrecked the economy. The Hryvnia lost 60% of its value in 2014/15.  Natalie Jaresko, now Ukraine’s Finance Minister, said this week that when President Poroshenko hired her in February, 2014, there was less than one month’s national cash need in the Treasury. With support from the US, EU, and Japan, she negotiated $12 billion of IMF bridge loans, restructured Ukraine’s debt repayments, began programs to reduce corruption at all levels of government and business, and “electronified” tax collections.Andriy Vatatursky was elected to Parliament in 2014, where he has been working on de-centralizing political power away from Kiev. Yuriy Kosiuk, was appointed Deputy Chief Staff to Poroshenko for Defense Affairs in early 2014 and directed the complete rebuilding of Ukraine’s armed forces. MHP still is producing massive amounts of poultry.

Despite all the turmoil in Ukraine since 2012, grain exports set a new record in 2014 and exceeded Russia’s grain exports by 10%, about 2.5 MMT. An ambitious port-dredging program continues that will ensure all major ports can handle Panamax vessels. Cargill recently signed a memo of understanding to build by 2017 a new port elevator in Yuzhny, Ukraine’s largest grain port. Three citizens rose to the occasion in the past 18 months in a very difficult situation. There have been many more.

As much time as I have spent studying and following Ukrainian affairs since 2008, I could never have imagined most of this would happen. My crystal ball for the future is humbly cloudy. On the other hand, Ukrainians have shown they are as resilient and hard-working as Poles have been. They were nearly bankrupted a third time by Russia. Perhaps they have turned away that threat for now.

Wayne